Farm & Food File: The double-edged blade of debt

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Feb 11, 2018 at 10:35 AMFeb 11, 2018 at 10:35 AM

By Alan Guebert

It was an inarguable fact on the southern Illinois dairy farm of my youth that there was no earthly reason my grandfather, one of the farm’s principal owners, would ever borrow money from any bank, person or company.

It wasn’t because he feared debt; he didn’t. As a St. Louis-based bond broker for almost 40 years, Grandpa used debt of every kind and class — U.S. Treasuries, corporate paper, municipal bonds — to make money for his clients. They, however, took the risks; Grandpa took the commissions.

In the 1940s, he and three investors paid cash for what became our family’s farm. Within a decade of that purchase, the partners built a state-of-the-art, 100-cow dairy knowing it could operate, as he often noted, “out of our back pocket,” with no borrowed capital.

And that’s the way it worked. Planning and savings, not impulse and debt, financed every move he and my father, its manager and later part-owner, made until the farm was sold in the late 1990s.

Interestingly though, no debt, like debt itself, carried a price. My oldest brother and I both returned to the farm after college in the 1970s with hopes of expanding the family enterprise. With the farm’s checkbook padlocked in Dad’s file cabinet, however, it quickly became clear that there would no be additional cows or land for us to get a toehold. Each of us soon left to make our own, different way.

Later, when I asked my father why he didn’t borrow to expand so Richard and I could join him, he explained that he “didn’t want to get you boys in trouble.” That was his upside-down view of debt: it wasn’t a hammer that could build, it was an ax that would cut.

Debt seems to be even more confounding today. In a Jan. 31 Wall Street Journal column, Princeton University economist Alan Blinder gives a short course on debt — in this case, government debt — and how it’s best used.

Blinder starts with a simple idea: “borrowing for productive purposes is perfectly sensible… as long as the projects finance(d) with debt generate income flows large enough to pay the interest and principal — and leave… some surplus…” That’s exactly what most business people do everyday.

For government — and for business, too — explains Blinder, the former vice chairman of the Federal Reserve, debt can grow at the same pace of Gross Domestic Product (GDP) and not become worrisome. So, if the American economy grows three percent in 2018, its budget deficit can grow three percent with little to no concern by debt analysts.

But not next year. On Jan. 26, the Committee for a Responsible Federal Budget, a Washington, D.C. budget watchdog, estimated that the U.S. federal deficit will hit $812 billion in fiscal 2018 and—given the direction of today’s ongoing budget negotiations—is headed for $1.2 trillion by fiscal 2019.

Even worse, “lawmakers do not appear to be finished adding to the deficits,” it noted. Congress is pushing increases in “discretionary spending caps and disaster relief” — including $1 billion more in unbudgeted cotton and dairy relief efforts — on top of the $1.4 trillion in unfunded tax cuts the White House and Congressional Republicans passed last year.

As any honest budget analyst can see, it all adds up to an almost endless string of $1-trillion-plus federal budget deficits. And that’s before Congress borrows one penny for Prof. Blinder’s “perfectly sensible productive purposes … schools and highways … (that) leave society better off.”

Which takes me back to my prudent patriarchs. Neither believed in personal debt but neither left their heirs worse off. The gang of billionaires and millionaires now in charge already has.

Alan Guebert is an award-winning agricultural journalist and expert who was raised on an 720-acre, 100-cow southern Illinois dairy farm. He began the syndicated agriculture column “The Farm and Food File” in 1993 and it now appears weekly in newspapers throughout the United States and Canada. He can be reached at farmandfoodfile.com.

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